Conflict Minerals Are Creating Compliance Challenges

The requirements of being a good corporate citizen are not difficult to figure out: Lower your carbon footprint, promote diversity and support your local community. With those three, you’ve got the majority of it covered. But now there’s a new corporate citizenship requirement at the table that is not as easy to ensure is being met: the avoidance of using conflict minerals. Many CEOs are in a complete quandary as to how to proceed.

The problem stems from a law that was part of the 2010 Dodd-Frank Act that was intended to choke off financing for violent militia groups in and around the Congo. These groups sell the minerals, such as tantalum, worldwide for use in products ranging from smartphones to engagement rings.

Going forward, CEOs must decide how to proceed despite the murkiness of the law
and other difficulties.

In June, all companies using minerals as a raw material were supposed to provide their first reports to the SEC about whether they use any that are on the “conflict” list, and if so, where and how. The mere cost for doing these first reports—estimated by the SEC to total $3 billion to $4 billion—has made the task difficult to achieve. It was projected that companies would spend nearly 500 hours, on average, compiling their first reports—about 25 percent of the average time spent on an annual report.

Moreover, information flow in this area is so premature that only a handful of companies have been able to complete their supply-chain investigations to date. Then the requirement became muddied in a U.S. Court of Appeals for the District of Columbia decision in April that struck down part of the regulation, stating that forcing companies to list their products as “conflict free” or not violated corporate free-speech rights. So currently, companies only have to prove they investigated their supply chains.

Going forward, CEOs must decide how to proceed despite the murkiness of the law and other difficulties. Odds are that the SEC will continue to press forward, with no particular reward for companies that accelerate their investigations or penalty for companies that lag—because almost all of them are lagging.

“What we’re looking for at this stage is reasonable due diligence efforts,” Bennett Freeman, a senior vice president at Calvert Investments, which focuses on corporate responsibility, told The Wall Street Journal.

But beyond SEC requirements, there eventually will have to be a brand stance that works with customers and shareholders that goes farther than saying “we’re SEC compliant on this issue.” (Think of the Good Housekeeping Seal of Approval or the “TRUSTe” logo.)

With the proliferation of corporate-responsibility criteria being put forth by investors, consumers and activist groups these days, and the struggles that CEOs experience in attempting to keep up with it all, “conflict minerals compliance” is likely to remain low on the list. However, ignoring it in these early years could do more harm than good. Starting those conversations now with all suppliers could ensure that your company is ready when it needs to be.